About Bulgaria: Bulgarian Economy

Bulgaria''s economy contracted dramatically after 1989 with the loss of the Soviet market, to which the Bulgarian economy had been closely tied. The standard of living fell by about 40%, but it regained pre-1990 levels in June 2004. In addition, UN sanctions against Yugoslavia and Iraq took a heavy toll on the Bulgarian economy. The first signs of recovery emerged in 1994 when the GDP grew and inflation fell. During 1996, however, the economy collapsed due to poor economic reforms and an unstable banking system. Since 1997 the country has been on the path to recovery, with GDP growing at a 4-5% rate, increasing FDI, macroeconomic stability and EU membership set for 2007. The current government, elected in 2001, has pledged to maintain the fundamental economic policy objectives adopted by its predecessor in 1997, i.e., retaining the Currency Board, practicing sound financial policies, accelerating privatisation, and pursuing structural reforms.

Since the IMF-proposed currency board was introduced in 1997, Bulgaria has enjoyed macroeconomic stability and robust GDP growth (5.8% in 2004), albeit the level of GDP per capita remains very low by EU standards. Growth has been fuelled mostly by strong domestic consumption and investment. Privatisation and market liberalisation are in a closing stage, with very few areas still subject to state monopoly. Foreign investment has been rising steadily, especially in the retail sector, even though the business environment has a lot of room to improve. Portfolio investment is also about to rise, as the government successfully floated almost 35% in the largest telecommunication company, BTC. Steady consumption growth has also led to rapid credit growth, filling in the very low saturation of financial markets. Inflation has been more or less under control, even though it has reflected recent external shocks, such as the higher oil prices. Public debt has been constantly shrinking, falling under 35% of GDP. Fiscal performance has been very solid with the budget close to a balance. In 2004, a general government budget surplus at 1.1% of GDP was reported.

Strong consumption and liberalisation of the economy, however, have led to expanding external deficits. The current account deficit has reached a peak at 7.5% of GDP in 2004 and is likely to remain high in 2005, reaching an annualised 12.2% of GDP in the 12 months to August 2005. Large external deficits and rapid credit growth have recently caused concern at the IMF and authorities have been forced to take restrictive measures. This has led to disagreement between the cabinet the most recent IMF mission on fiscal policy, as the cabinet was not ready to go as conservative, as the Fund would like it to. Although Bulgaria still has an outstanding arrangement with the Fund, however, dependence on official creditors has faded considerably and the country has an investment-grade rating with two of the three major rating agencies. This has been solidified by the buyback of the entire outstanding Brady bond debt in 2004 and 2005.